Q1) Why are we taking things away from retirees
before we’ve taken other measures?
In the last two and a half years, we have reduced our quarterly expense
run rate from $2.9 billion to $700 million. And almost none of that
involved reductions in retiree benefits. It involved dramatic work force
reductions; divestitures of businesses and real estate; streamlining the
product portfolio; consolidating regions; centralizing our entire supply
chain operation; outsourcing virtually all of our manufacturing; and
dramatic benefit reductions for our active workforce. In fact, no
manager hired after June 30, 1986, will receive any level of retiree
healthcare subsidy. There have been no Lucent-wide bonuses for officers
since 1999, extremely limited raises for officers, and nominal raises
and bonuses below officer level in the last four years.
We took a myriad of actions before we took any significant action on
retiree benefits. These are all tough decisions. And none of them have
been made lightly. But, we need to take the actions necessary to keep us
viable in order to be sure that we can provide access to retiree
coverage with some level of subsidy.
Q2) Didn’t the top officers receive “retention bonuses”?
Almost three years ago, Henry Schacht returned to Lucent after the Board
determined that Rich McGinn was not the right person to lead the company
in a turnaround. At that time, Henry offered a limited number of
officers retention payments if they stayed for two years to help him
turn the business around. This was designed to reduce their personal
risk if a new CEO determined that he or she needed an entirely new team.
At that point, there were sectors of the market that were doing well and
these leaders all had the potential to go to more secure employment if
they chose to do so.
It was a decision that was made almost three years ago, and the final
portions of those commitments were paid out last year. And it kept the
leadership team in place who developed and executed the plan that kept
the company in business during the deepest and most prolonged market
slump in the industry’s history. During that time, the company reduced
the cost structure by 75%; doubled the gross margin rate; reduced vendor
financing commitments by 91%; reduced cash burn from $1.3 billion in the
first quarter of fiscal 2001 to less than $100 million in our last
quarter; and, perhaps most importantly, enabled the company to post the
highest customer satisfaction results in years.
It was a business decision that Henry and the Board stand by, and which
has been extensively disclosed to the public.
Q3) Doesn’t the fact that the pension fund and the healthcare trusts
that AT&T gave you no longer have the assets to pay for retiree
healthcare mean that the funds were poorly managed?
No. The fact is that the retiree healthcare trusts themselves were never
fully funded, not even under AT&T, and unforeseeable market dynamics —
not mismanagement — have eliminated the pension surpluses that we had
expected to use for funding retiree healthcare. Six years ago, no one
could have predicted that healthcare costs would rise 85% and they
certainly would not have predicted the dramatic and lengthy decline in
the equity markets in the past two years.
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Our pension fund has actually outperformed
market benchmarks since 1998 when we took over management of those
assets from AT&T. We saw greater growth, and a slower decline than the
market over that same period.
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I’d also tell you that when you look at our
peer companies in the S&P 500, Lucent is still one of the largest and
most well-funded pensions (albeit under tough market conditions for
everyone).
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Our assets are professionally managed by a
subsidiary composed of investment professionals who act as fiduciaries
and make investment decisions based on the best interest of plan
participants.
When AT&T spun off Lucent in 1996, it transferred to
Lucent the obligations for pensions and healthcare for the people who
had retired from any of the businesses that formed Lucent. At that time,
healthcare inflation was in the mid-single digits, the telecom industry
was growing in double-digits, and our retiree to employee ratio in the
U.S. was much smaller than today (0.9 to 1 in 1999 versus 5 to 1 today).
Lucent was able to pay for healthcare through the partially funded
trusts it inherited from AT&T, and through transfers of excess assets
from our pension plans. These pension transfers were permitted by law as
long as our pension plans were funded at 125 percent or more, and
allowed us to use part of our excess pension assets to pay for retiree
medical coverage. But, the drop in equity markets has reduced plan
assets, and lower interest rates on bonds have increased plan
liabilities — so these transfers are not currently possible.
Conditions have changed dramatically:
·
At its peak, Lucent was a $38 billion
company, and our pension plans were over funded by 125 percent or more.
But six years ago, no one could have predicted that healthcare costs
would increase so rapidly, or that the market — both telecom and global
— circumstances would be what they are today.
·
As the number of retirees have grown 22%,
our retire healthcare costs have increased 85% — from $460 million in
1997 to an estimated $850 million for 2003.
We’re left with no choice but to take these actions to
preserve access to and a level of subsidy for retiree healthcare
coverage. These costs will represent 10% of our revenues and close to
half the costs of our entire annual payroll if left unmanaged. We simply
had no choice.
Q4) Why don’t you cut executive pay further?
The first and primary reason is that we need to pay
competitively to attract the right leaders and talent at all levels of
the company to keep the business moving forward.
And second, even if we eliminated the salaries for every officer in the
company today, it would only address about 1% of the retiree healthcare
cost issue. The fact is, the money Lucent spends on executive
compensation has already been reduced significantly in recent years. At
our peak, we had more than 80 officers, today we have 32. There have
been no annual bonuses for Lucent’s officers since 1999. And given the
fact that approximately 60% of executive compensation is at risk (in
options and long term incentives) the average Lucent officer makes half
of what he or she did four years ago.
Q5) We intend to write our Congressmen and tell them to support
legislation that stops companies like Lucent from cutting retiree
benefits.
The problem with legislation like that is if it passes, companies that
have a large retiree base may be forced out of business — and that would
eliminate access to medical care and any level of subsidy.
The point is, even with these changes, you can’t lose sight of the fact
that Lucent still provides better benefits to its retirees than about
90% of U.S. companies.
We continue to provide:
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A choice of plans, ranging from traditional
indemnity and a Point of Service plan to a number of HMOs and even a
pharmaceutical-only plan
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Plans that cover in-network and
out-of-network doctor visits, hospitalization, ER visits, physical
therapy, rehabilitation and drugs.
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The ability to opt in and opt out of Lucent
coverage going forward so that retirees will have a safety net for
access to medical coverage when needed
·
Continued access to Lucent's group dental
plan at very competitively priced group rates.
We also provide company paid retiree life insurance as
well. Even with the changes we’re making to some subsidies in 2004,
Lucent is still paying the majority of the total cost of healthcare
coverage for our retirees and employees.
Q6) Doesn’t Henry Schacht receive a pension, a consultant’s contract
and better benefits than other retirees?
As for Mr. Schacht, he currently has a consulting agreement with the
company to handle legacy issues such as our shareowner litigation and
retiree healthcare issues. That compensation was adjusted in July to
$30,000 a month (from $55K) with the shareowner litigation work
generally completed.
While he does have an accrued pension benefit for his time as an
employee of Lucent, Mr. Schacht is not collecting a pension from Lucent
today, nor does he receive any subsidized healthcare benefits.
By the way, all retired executives receive the same healthcare benefits
as other retirees (and only if they meet retirement eligibility criteria
when they leave the company).
Q7) Aren’t you breaking a promise to retirees?
These are difficult decisions that we have thought long and hard about,
and they weren’t made lightly. And let me be clear that although we have
consistently reserved the right to change management retiree health
benefits, we intend to continue providing access to and a level of
subsidy for healthcare coverage for our retirees. But we needed to
address these issues head on today to ensure Lucent’s viability going
forward and to be certain that we will be able to provide access to and
a level of subsidy for healthcare coverage for our retirees — now, and
well into the future. |